Britain is facing the steepest recession in modern history, Mervyn King, the
Bank of England Governor, declared as it laid bare the full extent of the
damage wrought by the financial crisis.

The economy will take longer to recover from this recession than it did in previous economic slumps and it will take “several years” before banks are lending normally to households and businesses, Mr King said.

The downbeat message came as the Bank disclosed that it was likely to keep interest rates low for far longer than experts had predicted as Britain shakes off the effects of the downturn.

The Bank said that it expected the economy to contract by an annual rate of 5.5 per cent at its lowest point this year – an even deeper dive than experienced in the 1930s – let alone any of the other postwar recessions.

As a result, the Bank is expected to leave borrowing costs on hold at their current record low rate of 0.5 per cent well into next year, if not longer, as well as continuing its £175 billion quantitative easing programme to pump cash directly into the economy.

In the latest indication of the scale of the recession, official figures showed that a third of people aged between 16 and 18 are out of work, as total unemployment climbed to 2.44 million, the highest level since 1995.

The figures, released hours before Mr King’s statement, were described as “pretty horrible” by economists, who warned that there was a whole generation of school leavers and university graduates who faced the prospect of being jobless for months to come.

Unveiling the economic forecasts, Mr King said that the Bank was doing everything it could to ensure that Britain did not follow in Japan’s path and succumb to a “wasted decade” of economic stagnation.

But he indicated that the financial crisis had been of a scale that rivalled anything previously witnessed in history. “We’ve been through an extraordinary financial crisis,” he said.

“One doesn’t need to ask questions about 'the worst since when’ since it may be hard to find any period in which it was actually worse.”

Mr King added: “ What we have to do is to recognise that the banking sector is still in a very bad way. It will take several years for it to repair its balance sheets, to get back to the point when it will be weaned off very large amounts of public support and in a position again to lend normally.”

Mr King said it was “more likely than not” that he would have to write a letter of explanation to Alistair Darling, the Chancellor, later this year as inflation was expected to fall more than one percentage point below the Bank’s 2 per cent target.

The Office for National Statistics said that 722,000 people aged 18 to 24 were out of work – one in six – while there were 206,000 people aged 16 to 18 out of work, 32 per cent of this age group.